Moneycontrol
Nov 28, 2016 10:33 AM IST | Source: Moneycontrol.com

Rising oil prices could be Modi's worst nightmare

Analysts at Credit Suisse feel the cut would result in a minimum 300- 500 million barrels of inventory draw-down, sufficient to drive an oil price recovery to above USD 60 a barrel from Q2 2017 onwards.



It is said bad news come in pairs. For the Indian economy, it is just pouring in. The government’s demonetisation move has brought the economy to a grinding halt. To add to it, the possibility of a rate hike in the United States has resulted in money leaving Indian shores, adding pressure on the value of the rupee. Now there is a bigger threat in the form of rising oil prices.

Crude oil prices are expected to rise as producing nations contemplate production cuts. The Organization of Petroleum Exporting Countries (OPEC), the cartel that accounts for a third of global oil production, is meeting in Vienna on November 30, 2016 for a possible production cut. Russia, the largest non-OPEC oil producer, is also proposing a production freeze at current levels of output.

Analysts at Credit Suisse feel the cut would result in a minimum 300- 500 million barrels of inventory drawdown, sufficient to drive an oil price recovery to above USD 60 a barrel from Q217 onwards. Under the most bullish scenario the research firm expects oil to reach near the USD 70s.

For India, rising oil prices and falling rupee is like a worst case scenario. As India is a net importer a falling rupee increases the cost of imports. Also, as India imports crude oil from a number of countries it follows prices of a basket of crude.

Basket of crude prices are in dollar as well as rupee terms. So a depreciating rupee increases the cost of imports. As per government data the Indian basket of crude oil stood at USD 46.59 a barrel on November 24 as compared to USD 49 for Brent crude. The government uses a fortnightly average of crude oil which is then used for calculation of product subsidy. Average price for Indian basket of crude stands at USD 44.80 a barrel for the past fortnight.

However, the falling rupee has pushed crude oil prices in rupee term to Rs 3,198.56 a barrel as compared to the fortnightly average of Rs 2,990.85 a barrel. What the numbers have highlighted is a near 4-percent rise in international crude oil in a fortnight is accentuated by a falling rupee to a nearly 7 percent hike in price of imported crude oil.

India imports oil at the rate of 4.29 million barrels per day. Thus every dollar rise in oil prices results in USD 128 million to the oil import bill every month or USD 1.54 billion every year. If crude oil touches USD 60 due to an oil production cut then the oil import bill could rise by over USD 15 billion a year. For context, last year’s bill was USD 64.4 billion.

Now assume that the rupee touches 70 per dollar as predicted by economists: The oil import bill could rise by Rs 1.08 lakh crore. For an economy grappling with demonetisation, if this is not a worst case scenario, then what is?
Sections
Follow us on
Available On